Distinguishing between an employee and an independent contractor is not always an easy task. Multiple different standards apply depending on the context. In Minnesota, persons working in the construction industry must be classified as employees unless they meet a stringent test and register with the Minnesota Department of Labor and Industry. The traditional way to obtain state approval to act as an independent contractor is to obtain an independent contractor exemption certificate (ICEC). However, on September 15, 2012, a new law went into effect authorized a two-year pilot program meant to streamline the process. See Minn. Stat. § 181.723, as amended (Minnesota Section Laws, Chapter 295). In part, the program now only requires a free, online registration to be completed for a business to act as an independent contractor. A contractor with a current ICEC may continue to operate under that certificate. However, when the ICEC expires, the contractor will be required to register under the new system. The goal of this pilot program is to streamline process, increase compliance, and make it easier for general and intermediate contractors in the construction industry to determine compliance of their subcontractors.
A Minnesota construction contractor will still be required to meet a nine-factor statutory test to be considered an independent contractor. Unlike the Federal Department of Labor and IRS independent contractor tests, a Minnesota construction contractor must satisfy every factor to act as an independent contractor. This requires that a contractor meet all of the following requirements:
- Maintain a separate business with the individual’s own office, equipment, materials and other facilities;
- Hold or have applied for a Federal Employer Identification Number or filed business or self-employment income tax returns in the previous year if the individual performed services in the previous year;
- Operate under contracts whereby the contractor performs specific services for specific amounts of money and under which the individual controls the means of performing the services for;
- Incur the main expenses related to the services performed under the contract;
- Be responsible for satisfactory completion of the services and liable for failure to complete the services;
- Receive compensation on a per job or competitive bid basis and not on any other basis such as hourly;
- Have the possibility to realize a profit or suffer a loss on the contract;
- Have continuing or recurring business liabilities and obligations; and
- Have his or her business depend on the relationship between business receipts and expenditures.
These factors are designed to make it difficult to classify any individual working in the construction industry as an independent contractor.
Certain persons are exempt from the requirement to register or obtain an ICEC including those performing certain services such as landscaping and those operating under a license, such as an architect.
A general or intermediate contractor who is securing the services of a subcontractor should independently verify that the contractor is registered, licensed, or exempt, which can be done at http://secure.doli.state.mn.us/lookup/licensing.aspx and verify that the subcontractor meets the nine-factor test.The engaging contractor should also verify registration of a business entity at http://mblsportal.sos.state.mn.us and ensure that subcontractors have adequate workers’ compensation insurance coverage which can be done at http://www.inslookup.doli.state.mn.us. Under Minnesota law, a contractor whose subcontractor fails to maintain adequate coverage is responsible for paying workers’ compensation benefits to the subcontractor’s employees. The engaging contractor should enter into a written contract for services and obtain invoices and pay the business entity, not the individual business owner.
It is always important for companies using the services of independent contractors to ensure that they have not unintentionally created an employment relationship. A contract that properly identifies the obligations of the subcontractor, and includes representations from the subcontractor concerning the nine-factor test, can significantly strengthen the likelihood that the relationship will be deemed to be that of an independent contractor. Compliance with this new law is one important piece of that puzzle.